The 2nd and 3rd The largest US bank failure in history has just happened, and more fireworks are coming. This is the predictable outcome of a centrally managed economy, where the Federal Reserve keeps interest rates in check causing wild speculation and only raises interest rates to combat the inflation they cause.
Boom, bubble, bust. Wash, rinse and repeat.
One of the most confusing lessons of college economics is the inverse relationship between bond prices and bond yields. Shouldn’t a bond be worth more if interest rates are higher? No, because the comparison is to market interest rates, and the bond’s interest payment (or “coupon”) is fixed at the time of issuance.
As prevailing market interest rates rise, existing bond prices fall, forcing previously fixed coupon payments and redemptions to match current yields to maturity.
A simple example: In mid-2020, the 10-year US Treasury rate bottomed out at 0.5%, so a $1,000 bond paid a $5 annual coupon. That’s a whopping 5 Simoleons to lend Uncle Sam a dollar.
More recently, however, US 10-year yields hit 4% as the Fed raised lending rates to combat inflation caused by its own easy-money policy. This means a coupon payment of $40 per year.
What would be the 2020 Treasury market price with a $5 coupon? A 4% yield to maturity would require more than a 20% drop in present value.
This is a large loss for an assumed “risk-free” asset. All types of bonds, including corporate bonds, municipal bonds and mortgages, suffered similar losses. And all of these assets are on the balance sheets of banks, insurance companies and pension funds.
As a result, banks will not be able to hold enough financial assets to meet their liabilities at current prices. Simply put, I don’t have enough money to support my deposit.
If too many people withdraw – like it’s a wonderful life – The entire system bursts into flames.
Sure, Silicon Valley Bank (SVB) should have “hedged” interest rate risk, but that means someone is hiding losses. It’s Trump’s giant house, and everyone owes everyone else.
The president, Treasury secretary, and chairman of the Federal Reserve all panicked and stepped up to guarantee deposits in “systemically important” banks.
But this genius move (Ironic warning!) was a signal for economic players to withdraw from smaller banks that may not be considered “systemically important”.
In other words, queue more bankruns.
The latest “Committee to Save the World,” as Time magazine actually calls it (during the previous self-harm crisis, they hung around feasting on the corpses of the middle class in the United States) understands this. When they do, they have to insure depositors’ funds across the banking sector.
The results are about the same as in 2008. Privatized gains, socialized losses, moral hazards that encourage bad behavior at the expense of taxpayers and currency holders.
Perhaps more relevant to your family, this means more price inflation. (i.e. the 2020 bond with a $5 coupon is back at $1,000 instead of $788).
In one fell swoop they undermine every attempt to fight inflation that we see.
Worse, they are picking winners and losers, giving away free money to those with enough connections, while small businesses, homeowners and consumers still bear the burden of high interest rates. .
This is not the America our ancestors approve of.
It’s clear: our debt-based fiat currency system implodes when they stop printing money. This is a feature, not a bug. Expect this base money trend reversal to continue upwards like a hockey stick.
These clowns, Bidens, Yellen, and Powell simultaneously (a) hold so much power that they destroy our economy, crushing job and retirement prospects from Mount High, and (b) completely stop this from coming. Not seeing is frankly alarming. I am a normal person and have been warning about it for years.
An even greater concern is the geopolitical context in which the BRICS countries (Brazil, Russia, India, China) and much of the Middle East, Asia and Africa are cooperating on alternative currency systems to reduce their dependence on currencies. , is all this happening. USD.
Recently withdrawn was Saudi Arabia’s agreement to accept oil from the Chinese yuan, cracking the petrodollar backing that saved the US dollar in 1974 (after abandoning gold backing in 1971). .
All this means that a global currency reset is imminent. It may not be slow, sustained inflation with a predictable rate of money printing. It may be a tipping point that happens soon.
Consumer prices are driven by two factors: (a) money supply and (b) money velocity.
The latter is psychological and non-linear.
A flood of US dollars returning to American shores could become a tsunami if foreigners lose confidence or are presented with a viable alternative that does not lose their 10% annual purchasing power.
Gold and silver are likely to see the signal first, so keep an eye on those prices (and keep some insurance on hand). Bitcoin also acts as an escape valve (self-control). It’s an excellent speculation to do.
Is capitalism failing?
No, dear friends, capitalism has not failed. Capitalism has no government bailout. There is no such thing as “too big to fail”. DC plush shirts can’t pick winners and losers.
True capitalism requires the abolition of the Federal Reserve System. The price of money, or interest rate, should be set in a free market between borrowers and lenders.
What we are failing today is a broken, crooked, debt-based fiat currency system that is moribund. A gigantic beast rampages on its deathbed, crushing and limp everything in sight.
In summary, the Federal Reserve created this crisis by cutting interest rates, printing money, enriching the rich, encouraging borrowing, and instigating insane speculation—”all the bubbles.” rice field. When this finally caused consumer prices to rise, they hiked rates, collapsed the banking system, and stuffed all the debt issuance gills. That now increases the risk of bank runs and system failures.
They don’t have the stomach for that, so the result is more inflation.